Rules for Stock Trading

This piece seeks to discover five rules that successful stock traders have regularly used to improve their chances of being on the winning side of the market. I can not guarantee that following these rules will ensure 100% success when you trade stocks; however, these rules will make it easier for you to maximize profits when you are in the right trade and they’ll help you reduce your losses when you are in a wrong trade.

Stock trading is one of the few businesses in which you can multiply your money, lose money or run into immense debts with a trading decision. Every stock trader loses money on some trades, but the fact that sets successful stock traders apart is that they have more winning trades than losing trades.

1: Invest in Your Education

When investing in your education, you should strive to understand the major factors that move the markets because the stock market is more dynamic than static. You should understand different trading strategies and work with a strategy that fits your risk-taking quotient and your experience.

The first rule and perhaps the most important rule for profitable stock trading is that you MUST invest in your education. I’m not asking you to go back to college or get further qualifications, but nobody can regularly trade stocks profitably without a functional understanding of how the stock market works.

2: Develop an Exit, entry, and escape Strategy

You must be cold and calculating if you want to trade stocks profitably. You should decide on the price at which you’ll be interested in buying the stock and how much of the stock you’ll buy per time (Entry).

You should come with a trading strategy and you must be disciplined enough to stick to your plan. You should also avoid becoming an accidental investor. Accidental investors buy stocks with a trading goal in mind; however, they might fall in love with the stock if it has a winning streak or they might start feeling pity for the company if it has a losing streak; hence, they usually hold on to stocks longer than necessary.

3: Master the Two Sides of the Coin

About 90% of people who enter the stock market usually come with the mindset of buying stocks at low prices and selling them at high prices. You’ll most likely be chasing highs by purchasing stocks in the hopes that their share prices will increase.

The fact remains that the most bullish stock in the market can not consistently maintain a rising streak without the occasional dip, pullback or even a correction. Stocks that are rising might drop as much as 60% of recent gains before they start another ascent. You should not be afraid to short stocks when they are clearly entering a losing streak.

4: Trade Only when You Clear

All stocks provide useful information with the buy and sell signals in their technical indicators. The simplest and probably most important buy/sell signal is the key resistant/support level. You should know how to identify the key support and resistant levels in order to trade stocks for profits when they are going upwards, downwards, or even sideways.

Successful traders go long when a stock triggers a breakout above a key resistance point, they short stocks on a breakdown below a key support level, and they trade stock options when stocks are going sideways. It doesn’t hurt to sit on the cash for a day or two while the choppiness in the stock clears away if you can not read the buy/sell signal clearly.

5: Don’t Buy/Sell Based on Hype

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You should know how to identify the key support and resistant levels in order to trade stocks for profits when they are going upwards, downwards, or even sideways.

Nothing beats doing your due diligence as explained in rule number 1 and entering the trade only after a careful consideration of rule number 2.

As much as I hate to be the proverbial wet blanket, I must tell you that more than half of the tips, info, and expert advice that you’ll read on the Internet or see on the TV about that one stock you must buy today are nothing more than hype.

You must be cold and calculating if you want to trade stocks profitably. You should decide on the price at which you’ll be interested in buying the stock and how much of the stock you’ll buy per time (Entry). Accidental investors buy stocks with a trading goal in mind; however, they might fall in love with the stock if it has a winning streak or they might start feeling pity for the company if it has a losing streak; hence, they usually hold on to stocks longer than necessary.

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Profitable Stock Trading Rules to Trade

If we get stopped out of a stock, we should not repurchase it for some number of trading days. Jumping back into a stock we were just stopped out of does work once in a while, but probably 90% of the time we get stopped out, the price decline is not over.

1: always use sell stop orders to protect yourself from devastating price declines.

 

2: you can not buy a stock you were stopped out of for 10 trading days.

3: use trailing sell stop orders to secure profits.

In “Profitable Stock Trading – 5 Rules to Trade By” we discussed the first five rules that will help you gain stock market trading success. Here we finish up with the final five rules.

4: when your profit goals for a given trade are met, sell the stock, despite of its presumed long-term prospects.

5: the average daily trading volume for the 10 trading days prior to our buy date should be at least 100,000 shares.

Stock prices fall and rise for one reason only, supply and demand. If too many people want to sell a stock (more sellers than buyers – a large supply), the price goes down. That requires that the stock trades sufficient volume to allow us to execute our transaction without our order causing a major price move against us.

When we examine our stock charts (a stock trading technique, not a rule, thus a discussion for future articles), we’ll pick a price at which we will place a sell stop order as soon as our buy order is executed. Jumping back into a stock we were just stopped out of does work once in a while, but probably 90% of the time we get stopped out, the price decline is not over. If a stock has gone up in price more than expected or is in a parabolic rise, we should cancel our static sell stop order and place trailing sell stop orders to protect from price reversals. Trailing stop orders set a price a certain dollar or percentage amount under the current stock price. The sell stop trigger price increases as the stock price goes up.

If a stock has gone up in price more than expected or is in a parabolic rise, we should cancel our static sell stop order and place trailing sell stop orders to protect from price reversals. The sell stop trigger price increases as the stock price goes up.

Remember, we are trading stocks, not buying and holding them for years. This means we will sell some very good stocks once our profit goals are met, then possibly watch them go higher, maybe even much higher. If we absolutely love a stock and can not stand the thought of not owning it, we can establish a core long-term position then trade an additional amount of shares (our “trading” position), giving us the best of both worlds.

They are not trading techniques, which are in a whole different category and require skill and judgement to effectively buy and sell stocks at the optimal time and price. Stock trading techniques will be discussed in future articles.